Confidence Levels In Estimates

Organization: The Australasian Institute of Mining and Metallurgy
Pages: 4
Publication Date: Jan 1, 1990
Traditionally, capital costs of major resource development projects have been estimated as a single amount to which a percentage accuracy has been assigned based on the method of preparation of the estimate, that is, on the amount of information available to develop the estimate.However, there is a growing recognition of the importance of a probabilistic approach to capital cost estimates, and of a more rigorous calculation of estimate accuracies and of the presentation thereof. Accuracies can be expressed with more certainty as a percentage of the estimate amount where the percentage represents one standard distribution on the probability curve for the capital cost of that specific project. Thus confidence levels can be stated for various estimated amounts - for example, it can be stated that there is an 85% chance that a stated amount will not be exceeded, or a 90% certainty that a (higher) amount will not be exceeded. Moreover, the right skewness of the probability distribution curve for most projects can be readily recognised and reflected in the evaluations. This enables senior executives and board members to have a clearer understanding of investment uncertainties, and the possible magnitude of commitments.
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